Online banking--is it for you?
By Philip Bulman and Marian Miller King • Bankrate.com

Growing numbers of consumers are experimenting with online banking, searching for convenience and value.

Will they find what they are looking for?

That is by no means certain, but banks are finally "spending major dollars and doing major smart things with online banking," said Matt Cone, business development manager for Microsoft Money. "Increasingly, more are offering online banking through the Internet on their Web sites."

Online systems allow customers to plug into a host of banking services from a personal computer by connecting with the bank's computers over telephone wires. The convenience can be compelling. Not only is travel time reduced, but ATM machines, telephone banking or banking by mail are often unnecessary.

Technology makes online banking easier
And, technology continues to make online banking, once attempted only by computer enthusiasts, easier for the average consumer.

Even that may not be easy enough, though. Many systems that offer greater financial control also require more work. Online bill payment is an example of an effort that requires setting up which leads to ultimate convenience.

James M. Shelton, executive director of the Online Banking Association, thinks consumers will persevere.

"By far the hottest development in the online banking industry is one-click bill payment," said Shelton, director of the organization comprised of 70 banks and based in Corte Madera, Calif. "This is the ultimate in convenience for everyone. There are no more paper checks to deal with, and the bank gains the float.

"Providing online bill payment service has the potential to grow to billions of monthly payments," Shelton said. "It will take a few years to develop because getting that on the Internet is not an overnight event."

Banks form alliances to offer online banking
Alliances are forming to facilitate electronic payments and other aspects of online banking, said Shelton, including Integrion (with 18 large banks as partners); Microsoft MFSDC's new program and a third partnership called First Global Commerce, which is an alliance between Hewlett Packard, Electronic Data Services and Verifone.

Home-banking offers convenience
Banks use a variety of names for online banking services, such as PC banking, home banking, electronic banking or Internet banking. Regardless of the name, these systems offer certain advantages over traditional banking methods.

• Consumers can use their computers and a telephone modem to dial in from home or any site where they have access to a computer.
• The services are available seven days a week, 24 hours a day.
• Transactions are executed and confirmed quickly, although not instantaneously. Processing time is comparable to that of an ATM transaction.
• And the range of transactions available is fairly broad. Customers can do everything from simply checking on an account balance to applying for a mortgage.

Services vary from bank to bank
What services are available varies from bank to bank. Virtually all of the banks that offer electronic services allow consumers to check the balances in their accounts, transfer funds among accounts, and order electronic bill payments.

More sophisticated systems allow customers to apply for loans, download information about accounts into their own computers, trade stocks or mutual funds, and look at images of their checks and deposit slips.

Internet banking may be the best long-term choice
Banks take two approaches to online services. Most require consumers to have specialized software in their computers, while newer Internet-based systems allow customers to simply dial in and use the bank's software or software provided by an Internet service provider, such as America Online (AOL).

The two approaches have distinct advantages and disadvantages for consumers. Yet bank customers who do not yet use electronic banking would probably do well to choose Internet banking because the older systems are likely to be phased out during the next few years.

"Online banking will become Internet banking. Banks will just have this Internet branch," said James Verbrugge, a banking expert and chairman of the Department of Finance at the University of Georgia.

Client-based: Uses personal finance software
The "client-based" systems, in which customers use their own software, generally use personal financial managers -- specialized computer programs that help customers carry out a variety of personal finance activities. The most popular programs are: Intuit's Quicken, MECA's Managing Your Money, and Microsoft's Money.

These programs typically allow consumers to do much of their work off-line, and then dial in to complete their bank transactions. These client-based systems have the advantage of allowing consumers to integrate all their banking information with other personal finance data using a single program.

Although these software products can be purchased at computer stores, the versions offered by the institutions are enhanced to adapt to their systems. Some banks will allow customers to download the program for free, or will mail a copy to customers free or for a small fee. Shopping elsewhere is likely to reduce the efficiency of the system.

Client-based and Internet banking should co-exist
"The Internet is a powerful, inexpensive way to deliver mass-market online financial services," said Bill Harris, Intuit CEO. "Client-based solutions such as Quicken98 that take advantage of the Internet will help customers and financial institutions benefit from the best of both worlds."

Paul Harrison, president of MECA Software agrees: "Today's Internet banking solutions provide basic electronic banking functions," he said. "Working with many of North America's largest banks we are developing personal finance management capabilities, similar to those found in Managing Your Money."

Harrison said those can be offered to consumers directly from a bank's Internet site, thus merging the benefits of client-based software with the simplicity and convenience of the Internet.

"Quicken 98 offers a hybrid approach," said Joyce Thom, group product manager, PC Banking-Intuit. "New banks are signing up for the client-based system--over 50 institutions in two years."

Customer loyalty for personal finance programs is strong, she said. "We see very strong growth."

Switching banks can be difficult
For those who already own a personal finance program or enjoy learning how to use new software, the client-based approach works well. However, switching accounts from one bank to another may also require switching to new personal finance software, and customers will have to invest some time (and possibly the purchase price of the new program) in order to make the switch. It could also entail transfer of a lot of information from one program to another.

A few banks have developed proprietary software for online banking, which is usually free. Again, changing banks would present the drawbacks associated with learning a new program.

A handful of banks currently allow customers to choose between the older online banking systems or the Internet. However, this is expected to be a transitional approach that will stay in place only until all the online banking customers switch to the Internet. David Smith, director of access management at Citibank, one of the first banks to offer both approaches, said the older system might well be eliminated within a year as customers switch to Internet banking.

Internet banking is more portable, less versatile
The newer Internet-based systems allow users to dial in and then use the bank's own software (or that of an Internet service provider, such as AOL). Many consumers will find them easier to use than the older systems, especially customers who want electronic banking services but are not interested in doing a lot of other personal finance calculations. This interaction can be initiated from any computer, anywhere.

But an Internet system is less versatile as well. It cannot consolidate extensive personal finance information within a single program.

"There are lots of different flavors—lots of institutions offer different things," said Cone of Microsoft Money.

Internet systems may lower bank, consumer costs
Using an Internet-based system may also be less expensive in many cases. In general, a bank's costs will be lower when it provides a single electronic banking service via the World Wide Web section of the Internet. The bank then supports a single computer system instead of a multitude of personal finance programs that its customers may use. Cost savings allow the banks to charge lower fees for online banking, or to simply eliminate them completely. A few large banks that have set up Internet-based systems charge no monthly fee for online banking services and electronic bill payment.

Microsoft's Cone said that banks originally viewed PC banking as "a pilot program" or a process to be tested. But the Internet is finally taking online banking mainstream, .

"What is going to happen," said Cone, "is that there is a broad pricing issue at work here. Just as banks charge for checking accounts, there are different variations on that theme. Some charge for entering a branch. My sense is that online banking will be the lowest cost channel for banks, simply because they don't have to maintain a physical branch or presence to provide the service."

The most expensive aspect of online banking is bill payment, Cone said. "Banks that offer that service for nothing are eating the cost. It costs the banks $6 to $10 per month to provide bill payment."

Fees are often lower with Internet banking
"The bank should save money," said Tripp Rackley, president of nFront Inc., an Internet banking software company in Athens, Georgia. "On Internet banking, they're really not charging anything right now."

Still, consumers can run into fees regardless of which type of online banking system they use. Fees typically range from $3.95 to $6.50 a month for basic electronic banking services. Some banks charge an additional fee for electronic bill payment, ranging from $4.50 to $6.

Rackley recommends shopping around for those banks that have no monthly charges but provide a wide array of services at their Internet branches. "I would make sure I could do everything. You wouldn't put your money in a brick and mortar bank where the window was broken."

-- Posted: January 9, 1998